What do you mean by Reverse Charge mechanism under GST Goods and service tax
- Under Reverse Charge Mechanism only the buyer is the responsible person to pay the GST tax because the registration was not taken from the department by the seller.Here the buyer should not claim any input tax credit on his purchase because he did not pay it but GST will be collected from him on his sale
- Under Reverse charge, mechanism buyer should not claim any input tax credit on his purchase because he did not pay it but GST will be collected from him on his sale.
Reverse charge’’ means the liability to pay tax by the recipient of the supply of goods or services instead of the supplier of such goods or services in respect of such categories of supplies as notified under sub-section (3) of Section 8.
The concept of Reverse Charge existed earlier under the Service Tax provisions for services like Works Contract, Manpower, Goods Transport Agencies, Legal services etc., However, under the GST, Reverse charge mechanism has been introduced both for Goods and Services.
Section 2(85) “reverse charge’’, means the liability to pay tax by the person receiving goods and/or services instead of the person supplying the goods and/or services in respect of such categories of supplies as the Central or a State Government may, on the recommendation of the Council, by notification, specify.
As per section 9(4) of the CGST Act , the central tax in respect of the supply of taxable goods or services or both by a supplier, who is not registered, to a registered person shall be paid by such person on reverse charge basis as the recipient and all the provisions of this Act shall apply to such recipient as if he is the person liable for paying the tax in relation to the supply of such goods or services or both.
There are following elements which need to be present to trigger this section:-
- There should be supply.
- Supply should be in respect of taxable goods or services or both.
- Supply must be by unregistered person.
- Supply must be to registered person.
1. If the transaction is not covered under the definition of supply, this section won’t be applicable.
a) Sale of Land from unregistered person or agriculturist to ABC Ltd. who is registered in GST:-Sale of Land is not considered as supply so the provision of 9(4) is not applicable.
b) Sale of Alcohol from unregistered person to registered to registered person:- Not supply since the alcohol is kept out of the preview of GST so the provision of 9(4) is not applicable.
2.If the supply involved exempt goods or services or both this section won’t be applicable.
a) A registered person hire auto rickshaw for commuting from one place to another:- Section 9(4) won’t be applicable since transportation of passenger by auto rickshaw is exempted services.
b) A registered person stay in a hotel whose room tariff is less than Rs. 1,000/-:- Section 9(4) won’t be applicable since services by a hotel having declared tariff less than Rs. 1,000/- per day is an exempt service.
3.The Section is applicable to intra state taxable supplies only. As per section 24, in case of inter-state taxable supply, registration is mandatory without any turnover limit. So there could not be any taxable supply between the two states.
4.Supplier should be unregistered whether he is liable to registered or not.
5.Recipient should be registered
Situations where reverse charge will apply
1. Unregistered dealer selling to a registered dealer
In such a case, the registered dealer has to pay GST on the supply.
2. Services through an e-commerce operator
If an e-commerce operator supplies services then the reverse charge will apply on the e-commerce operator. He will be liable to pay GST.
For example, Xyz provides services of plumbers, electricians, teachers, beauticians etc. XYZ is liable to pay GST and collect it from the customers instead of the registered service providers.
If the e-commerce operator does not have does not have a physical presence in the taxable territory, then a person representing such electronic commerce operator for any purpose will be liable to pay tax. If there is no representative, the operator will appoint a representative who will be held liable to pay GST.
3. Other categories of supplies applicable for reverse charge will be notified by the Centre or State Government.
All persons who are required to pay tax under reverse charge have to register for GST irrespective of the threshold
Threshold: Northeastern- turnover in a financial year exceeds Rs 20lakhs (Rs Northeastern and hill states)]
Time of supply for goods under reverse charge
In case of reverse charge, the time of supply shall be the earliest of the following dates—
(a) the date of receipt of goods OR
(b) the date of payment OR
(c) the date immediately after THIRTY days from the date of issue of an invoice by the supplier (60 days for services)
If it is not possible to determine the time of supply under (a), (b) or (c), the time of supply shall be the date of entry in the books of account of the recipient.
For clause (b)- the date of payment shall be earlier of-
1. The date on which the recipient entered the payment in his books
2. The date on which the payment is debited from his bank account.;
Exemption to section 9(4) of CGST:- As per section 11(1) of the CGST Act, if the Government is satisfied that it is in interest of the public to exempt some goods or services or both, either fully or partly of the tax leviable thereon.On using this power, Government has issued notification No. 8/2017- Central Tax (Rate) which shall be in force from July 1, 2017.
As per the notification, exemption shall be applicable where the aggregate value of such supplies of goods or service or both received by a registered person from any or all the suppliers, who is or are not registered, is upto five thousand rupees in a day.
- Exemption is on intra state taxable supply.
- There is a limit of transaction value of Rs. 5,000/- per day:- means in case of supply more than Rs. 5,000/- per day, whole of such supply shall be taxable under reverse charge 9(4).
- Limit is in respect of all suppliers:- This should be noted that the limit is not respect to one supplier.
As per section 9(4) in case of any taxable supply by registered person from unregistered person,GST on the same shall be paid by recipient i.e registered person.Also it has been decided that Rs 5000/- per day exemption will be given in respect of supplies made from unregistered person.for supplies above this amount,a monthly consolidated bill can be raised.Now does this mean if my per day supply from unreg dealer is say 4500/- then i need not pay any GST on the same under RCM? Request you to please thrown some light on this modality.
See also: Invoicing under GST regime